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Small developers turn buyers into new source of financing

Small developers turn buyers into new source of financing
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First Published: Fri, Jun 22 2007. 12 15 AM IST
Updated: Fri, Jun 22 2007. 12 15 AM IST
Book a flat for Rs1 lakh and start earning rent on your flat from the next month onwards,” goes a radio advertisement by real estate developer Arun Dev Builders Ltd.
The scheme, which sounds tempting, is part of an effort by real estate developers, especially the relatively small ones, who are turning to flat buyers for financing after banks have started tightening lending to the real estate sector.
The plan is legal and simple: a builder typically takes a higher percentage of the total flat cost as the booking fee from a buyer prior to the launch of the project and uses the money to actually finish the project.
For instance, in a project launched by Arun Dev Builders, a buyer needs to pay a booking amount of Rs1-2 lakh and, after 40 days of the registration, the buyer will receive an interest of Rs1,500 every month from the company. In its brochure, the company refers to this interest payment as a monthly rent on the flat.
After 90 days of registration, the customer pays another Rs1 lakh to the developer as an instalment amount for the flat. A month after the second instalment amount is paid, the interest pay-out increases to Rs3,000-4,500. The remaining amount is to be paid at the time of possession of the flat.
The company launched this plan for its flats in Arun Dev Enclave in pilgrim city Haridwar. The flats vary between 404 sq.ft and 690 sq.ft in size, and the cost ranges between Rs4.4 lakh and Rs7.5 lakh, said Rahul Kumar, marketing officer of Arun Dev Builders.
Girirajii Associates, real estate brokers for Arun Dev Builders, claims that out of the 30,000 flats in Haridwar, around 10,000 have been booked so far.
While the proposal is an incentive for the flat buyer, the developer benefits from it because he gets higher than usual booking fees upfront. For instance, the booking amount of Rs1 lakh for a flat that costs Rs7.5 lakh is on the high side going by recent real estate standards. “The booking amount for any developer is usually 10% of the total cost of the flat,” says Kunal Banerji, a vice-president at another real estate developer Ansal API Ltd.
But for Arun Dev Builders, the booking amounts work out to a much larger proportion of the final flat cost. The interest fee handed by the company may go as high as 18% every year, but small developers have been left with no choice except to get creative, as borrowing from other informal sources for funds could mean paying rates of well over 30%.
Spurred by easier home loans and a greater push towards home ownership rather than tenancy, the real estate market in India has grown at a frenzied pace in the last three years with values doubling and even tripling in that period.
But “it has become difficult for the speculative real estate developers to borrow from banks,” says U.S. Bhargava, former chief general manager of Punjab National Bank, who retired in May after 36 years in banking.
To offset that and collect funding, some developers are also offering discounts on larger down-payment plans.
For instance, Shipra Group, another small real estate developer, has an offer for its flats in Indirapuram, near Delhi, where the rate per square foot is discounted when the buyer makes the entire down payment within 45 days of booking.
Under the plan, for a flat of 1,200 sq.ft which costs more than Rs36 lakh, if the customer makes the full down payment the rate comes down to Rs3,015 whereas, if it is paid in instalments the rate works out to Rs3,150 per sq. ft.
Another real estate company, OSB Group, launched a money-back scheme for its plots in Jaipur. “We used to have a similar scheme which we discontinued in April as all our plots were sold,” said Bharat Thakran, assistant manager, sales and marketing at OSB.
Under its plan, if the buyer cancelled the plot within a year of paying the booking amount, which ranged from Rs45,000 to Rs1 lakh, the company would return the entire booking amount to the buyer with 25% interest. OSB now plans to offer the scheme on some of its future projects.
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First Published: Fri, Jun 22 2007. 12 15 AM IST
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